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Dealing with multi-currency inventory risk in FX cash markets

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arxiv 2207.04100 v4 pith:HVOFGFZD submitted 2022-07-08 q-fin.TR q-fin.CP

Alexander Barzykin , Philippe Bergault , Olivier Guéant This is my paper
classification q-fin.TRq-fin.CP
keywords riskinventorymarketcashcurrencyflowframeworkmarkets
verification ladder T0 review T1 audit T2 compute T3 formal
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In FX cash markets, market makers provide liquidity to clients for a wide variety of currency pairs. Because of flow uncertainty and market volatility, they face inventory risk. To mitigate this risk, they typically skew their prices to attract or divert the flow and trade with their peers on the dealer-to-dealer segment of the market for hedging purposes. This paper offers a mathematical framework to FX dealers willing to maximize their expected profit while controlling their inventory risk. Approximation techniques are proposed which make the framework scalable to any number of currency pairs.

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  1. Optimal hedging of an informed broker facing many traders

    q-fin.TR 2025-06 conditional novelty 7.0 of 10

    An informed broker's optimal policy is to conceal the drift until a deterministic critical time, then disclose it fully, with an explicit piecewise control that is C/sqrt(N) optimal for finite trader populations.

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